Dr. Gary Stone, Winthrop University

OPERATION OF A COMPETITIVE MARKET FOR A PRODUCT: DEMAND AND SUPPLY IN ACTION

In a perfectly competitive market there are many small buyers competing with each other to buy the product at the lowest possible price. There also are many small sellers competing with each other to sell the product at the highest possible price. Assume the market for barley is a perfectly competitive market. This means no single producer of barley can affect the market price by changing how much she/he wants to buy. Each individual seller and buyer takes the market price as given. The market price changes when a large number of sellers or buyers change their activities in the market at the same time.

Price per Bushel	Quantity Demanded per Month	Quantity Supplied per Month	State of the Market (shortage or surplus)
$2.30	400 million bushels	300 million bushels
$2.40	370 million bushels	320 million bushels
$2.50	340 million bushels	340 million bushels
$2.60	310 million bushels	360 million bushels
$2.70	280 million bushels	380 million bushels

(a) The equilibrium (market) price of barley would be $__________ and the equilibrium quantity would be

__________ million bushels.

(b) Suppose the price of barley is $2.70. At this price the quantity demanded would be __________ million

bushels and the quantity supplied would be __________ million bushels. At $2.70 there is a (shortage,

surplus) in the barley market equal to __________ million bushels. As a result, the market price would (rise,

fall). As this price change takes place, the quantity demanded would (rise, fall) and the quantity supplied

would (rise, fall) until the quantity demanded equals the quantity supplied. This would occur at a price of

$__________ per bushels and at a quantity of __________ million bushels.

(c) Plot the area in the chart in the following graph. Indicate the equilibrium price and quantity. Check out the

state of the market at a price of $2.70.